An odd lot is a trade of fewer than 100 shares, often made by private investors. Brokers may charge a fee, but computer-based trading has made this less common. The odd lot theory, which suggests that these traders make poor investment decisions, was popular in the 1970s but has lost following.
In investment terms, an odd lot is typically an investment that trades fewer than 100 shares. These operations are more often carried out by private investors, rather than by large commercial companies. Although there used to be a penalty for placing an odd lot trade, today’s brokers usually handle them without charging any additional fees. This type of trading created an investment hypothesis called the odd lot theory that was popular in the 1970s.
Most investments are made in 100-share increments, called round lots. An odd lot is any trade that falls below this number of shares. Many private investors cannot afford, or do not want to invest, a full round lot, so they generally choose to do smaller trades. These batches may also be called broken batches or uneven batches.
Some brokers charge a fee of one eighth of a point per share when dealing with odd lot trades. The fee is usually called the spread. Loading a spread is not as common practice as it used to be. Computer-based trading often makes small trades as simple as large ones, so the fee may be unnecessary.
On the other hand, some traders may charge this fee simply because they don’t get as much commission on smaller trades as they do on larger ones. This problem is more likely to arise if the odd lot is a stock with a low purchase price. For example, if a stock is trading at one dollar, then the commission on even a round lot of 100 shares may not be enough for some brokers to trade it without charging a fee.
These actions were historically important. They were usually traded, not through a regular broker, but through an odd lot broker. Regular stockbrokers would often bring odd lots to the specified broker, who would then make the trade. The broker would usually charge by charging spreads.
For the most part, private investors buy odd lots rather than large companies, so many people have looked for patterns in this type of trading. People who want to understand them generally want to determine if it has any effect on the market or if it can be used as a signal of market trends. Some believe that studying the purchases or sales of rare lots may reflect the attitudes of private investors about the market.
Another hypothesis, called the odd lot theory, suggests that this type of trader is not well informed about market conditions and can therefore make poor investment decisions. People who subscribe to this theory often encourage investors to study what odd lot traders do, and do the opposite. The theory assumes that the opposite option would be the correct option to invest. This theory was popular in the 1960s and 1970s, but has since lost much of its following in financial circles.
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